CTA Case No. 4056 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Petitioner-~ - ver-sus -�� C.T.A. CASE NO. 4056 COMMISSIONER OF INTERNAL REVENUE, Respondent. -.. - - . - - ..-~., DE C I s I 0 N Disputed by petitioner- Philippine Long Distance Telephone Company is the cor-r-ectness and validity of the deficiency income tax liability in the amount of P495~425,391.00 for t he taxable year-s 1969 to 1980 assessed against it by r-espondent Commissioner of Inter-nal Revenue. The uncontr-over-ted facts as set for-th in r-espondent's memor-andum ar-e as follows: Peti t.ionf-:?r- Phi l.i.ppine Long Distance Telephone Company (PLDT f or- shor-t ) , a cor-por-ation duly or��ganized and e:cisting under- the 1aws of the Repub 1 ic of the

DECISION CTA CASE NO. 4056 2 Phi 1ipp.ines, was enfranchised to render local and .international telephone service on November 28, 1928 under Public Act No. 3436, as amended by Commonwealth Act No. 407, for� a p~;~rit-:>d of 50 years or unti 1 November�� 28, .1978. Under Section 7 of said Public Act No. 3436, it was provided that the payment o �f 1'1. franchise ta>: on all r;.tross receipts o �f the telephone and other electrical transmission business transacted under� the franchise shall be "in lieu of all ta:-:es" on the fr.:mchise or earnings thereof. On November 9, 1970, Republic Act No. 6146 was passed extending the life of PLOT's franchise granted under Public Act No. 3436 to another twenty-five years from the date of its expiration on November 28, 1978, "under� the ter�ms and conditions therein provided" and "that during the twenty-five-year period herein granted as ~?:�:tension, the gr�antee, its successors or assigns shall pay its franchise tax at an increased rate of five pe~r centum". (Section l, R.A. No. 6146) On .June l l , .1978, Pres.iden tia 1 Decree No. 1528 was promulgated requiring PLDT to pay a franchise tax of 2'1. thereby modifying the rate of 5'1. provided for in Republic:: Act No. 6.146, ef �fec::tive immediately up to the end of the twenty- five year extended period. Said P.D. 1528 also provides that "e:-:cept for the change in the rate of franchise tax herein prescribed, it shall be subject to the same terms and conditions as already provided for� under e:d.sting laws." On t1arc h 30, 1984, upon investigation conducted by respondent's examiners, PLDT was assessed in the total amount of P980,371,787.37 as deficiency income and withholding taxes for the

. DECISION CTA CASE NO. 4056 .".:.!."� years 1969 to 1980, inclusive of .interests and penalties a(Ess)e�:shsimbiet nt1. ' p. 73, BIR Rec.), which was assailed .in PLOT's 1et ter� dated May 25' 1984 (E)�:h.i.bit B, F'e~ti ticmer�) . On March 20, 1986, respondent issued his dec:isicm on F'LDT's pr�otest reducing the tax assessment to F'787,234,718.46 (Exhibit 2, pp. 297-304, BIR Rec:.). Fr�om the above dec: is ion, petitioner appea 1ed to this Court. However, as a result of the meld i �fica tion m.::~de by respondent in the administrative reinvestigation conducted after the f i 1 ing of the petition for review, as we 11 as the availment by petitioner of the provisions of Executive Order No. 44, the assessed amount of P787 , T)4 , 718. 46 was further to F'495,425,391.00 representing the total of the basic: deficiency income ta>:es on petitioner's �franchise operations for the taxable years 1969 to 1980. The r�emaining issues now limited to the validity of the deficiency income tax liability of petitioner in the amount of F'495,425,391.00 are: 1. Whether or nnt petitioner's income ta>: e)�:emption repea 1ed pursuant to Sec t.ion 24 (d) [now 24 ( c:)] as inser�t.ed by Repub lie Act No. 543.1 was

DECISION CTA CASE NO. 4 0 56 - 4- restored by Republic Act No. 6146 which took effect on November 9, 1970. 2. Whether or not the issuance of the 1969 to 1980 deficiency income ta:�: assessment against taxpayer on March 30, 1984 was in contravention of the provision of Section 338-A {now Section 278) of the National Internal Revenue Code on non- retroactivity of rulings. On the fir�st issue, respondent contends that the income tax exemption of petitioner as provided for� in its charter that the payment of the franchise tax therein sha 1 J. be in 1 ieu of any and all taxes, has been repealed by Section 24(d) [now Section 24(c)] of the National Internal Revenue Code inserted by Republic Act No. 5431 promulgated on June 27, 1968 and therefore petitioner has become liable for the payment of income ta:-: starting from its taxable year 1969. Section 24(d) reads as follows: (d) The provisions of existing special or general laws to the contrary notwithstanding all corporate taxpayers not specifically exempt under Section 27 of this Code shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the Government, including

DECISION CTA CASE NO. 4056 - 5- the Government Service Insurance System and the Social Security System but excluding educational institutions~ shall pay such rate of ta:�: upon their ta:<able net income as are imposed by this section upon associations or corporations engaged in a similar business or industry. As interpreted by the Court of Tax Appeals in Koronadal Electric Light & Power Co., Inc. vs. Commissioner of Internal Revenue , CTA Case No. 2600, June 26, 1979 (not appea 1ed) ; the Supreme Court in Radio Communications of the Philippines vs. Court of Tax Appeals, et al., G.R. No. 60547, Resolution En Bane dated July 11, 1985 and Cagayan Electric Power & Light Co., Inc. vs. Commissioner of Internal Revenue, et al. , G.R. No. 60126, September� 25, 1985, 138 SCRA 629, the income ta>: e>:emption of corporate franchise holders has been withdrawn by Repub 1 ic Act Nc-J. 54~H. Thus, in the later case of Cagayan Electric Power & Light Co., Inc. , the Supreme Court held: On June 27, 1968, Republic Act No. 5431 amended section 24 of the Ta:-: Code by making liable for income ta:-: ~.Lt corporate taxoavers not specifically exempt under paragraph (c)(1) of said section and section 27 of the Ta>: Code notwi t.hstanding the "provisions of

DECISION CTA CASE NO. 4056 - 6- e:dsting special or- gener-al laws to the contr-ar-y". Thus, fr-anchise companies we r- e s u b j e c ted to !_Q..fQf.!.~f.'L....ta :�: i.EL.._E..s.:f_l;!_.:!,_t i Q.O. :t9_....f..r.sm�..bj,__�_li?.___t.P.-J:t � Repub 1ic: Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all cor-por-ate taxpayer-s not expr-essly exempted ther-ein and in section 27 of the Code, had the effect of wi t...IJ.qr-aw.io_g_ petitioner-'s e:�:emption ....__f..r::.Q.f.!.!. i.m: o_m..li?.___t~t~.� F'et.i tioner- does not question the legality of the r-ulings laid down in the afor-ec:ited cases insofar- as .it a f fee: ts �fr-anchises gr-an ted pr-ior- to the effective date of Republic Act No. 5431 but asser-ts that the subsequent enac: tmen t of Repub 1 ic: Act No. 6146 on November- 9, 1970 amE~nding pet..i tioner-' s or-iqinal fr-anchise,?, peti tione1~' s e:�:emption fr-om income ta:�:, thus i t s liability for- income tax would only be for- the per-iod Januar-y 1, 1969 to November- 9, 1970. ( E>: h. F-�1, pp. 4�77-478' BIR p. .1.69, CTA r-ecor-ds. ) The pr-ovisions of Republic Act No. 6146 amending petitioner-'s fr-anchise, r-epr-oduced in full an�? i:\S fc) 11 ows:

., DECISION CTA CASE NO. 4056 - 7- [REPUBLIC ACT No. 6146] "AN ACT EXTENDING THE TERM OF THE FRANCHISE GRANTED TO THE PHILIPPINE LONG DISTANCE TELEPHONE COMPANY UNDER ACT NUMBERED THREE THOUSAND FOUR HUNDRED AND THIRTY-SIX, AS AMENDED BY COMMONWEALTH ACT NUMBERED FOUR HUNDRED AND SEVEN, AND FOR OTHER PURPOSES. "Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled: "SECTION 1. The term of the franchise granted to the Philippine Long Distance Telephone Company under Act Number� Three thousand four- hundred and thirty-six, as amended by Commonwealth Act Numbered Four hundred a nd seven, is hereby extended, under the terms and conditions therein provided, for a period of twenty-five years from the date of its expiration: Provided, That during the twenty-five-year period herein granted as extension, the grantee, its successors or assigns shall pay its franchise tax at an increased rate of five per centum. SECTION 2. This Act shall take effect upon its approval. "Approved, November 9, 1970." Petitioner submits that Republic Act No. 6146 is a "reference statute" that el�:tended the term of its original franchise under Public Act No. 3436 as amended by Commonwealth Act No. 407 for a period of twenty-five years at an increased rate of franchise ta :�: amounting to five per centum "under- the terms

DECISION CTA CASE NO. 4056 - 8- and conditions therein provided." It .is ur9ed that. the specific adoption by reference of the terms and conditions contained .in the earlier acts serves to lift. such terms and conditions fr�om the adopted statute and bodily .incor�porat.es them in the adopt.in9 statute as if it had been written at full length, without the necessity of a verbatim repet..i t.ion then.,of in the adopting statute. From the bare wor-dings of Republic Act No. 61.46, the legislative intention was only to revive or� re- enact all the "terms and conditions" provided in petitioner-'s original �fr�anc:hise, includin9 the "in 1ieu of all ta:�:es" provisions c:cmt.a.i.ned in Sec:t.icm 7 therein, which was withdrawn by Republic Act No. 5431. Any ~f feet cJf Republic Ac:: t No. withdrawing the income tax exemption granted under petitioner's original franchise has been ne9ated and neutralized by the passa9e of Republic Act. No. 6146 specifically adopting by reference and re- enacting the "in lieu of all ta:�:es" pr�ovis ion contained in Section 7 of petitioner's original charter, effective November 9, 1970. (Petitioner's memorandum, pp. 172-173, CTA records.)

DECISION CTA CASE NO. 4056 - 9- We are unable to agree with petitioner. It is not disputed that Republic Act No. 6146 is a reference statute or a statute of specific reference. As aptly quoted by respondent~ "a statute of specific reference incorporates the provisions referred to fr�om the statute ~EL .9.f.. .!:JJ.~ _time ____g_f____E;\d~_,t_q.o.. without subsequent amendments unless the legislature has e:-:pressly or by strong implication shown its intention to incorporate subsequent amendments with the statute". (Sutherland Statutory Construction~ Vol. 2, p. 548, or Vol. 2A, p. 324, underscoring supplied.) The above-mentioned "subsequent amendments" refer to amendments to the adopted statute ~1.t.er:-__!;D_f:?..__:!;..:!._f!l_~_.__g_.f_ J,j;:_�____..~Q.Q.Q_t..t...9.0._.__~..o fL..n.o t...........Q.Li o..r..::._.....t..9_..il!..�______t....h.m.g_______..9..f........._i._t..? Since Republic Act No. 5431 enacted on June 27, 1968 had already amended petitioner's original franchise by withdrawing its exemption from income tax prior to its adoption by the reference statute~ Republic Act No. 6146, on November 9~ 1970, obviously~ the terms and conditions incorporated in Republic Act No.

DECISION CTA CASE NO. 4056 -� .10 - 6146 no longer included such exemption from income Presidential Decree No. 1528, issued on June 11, 1978, a subsequent amendment to petitioner's franchise modifying the rate of petitioner's franchise ta}: to 2%, also adopted the terms and conditions of petitioner's existing franchise minus its e>:emption from income ta:�: which had already been withdrawn by Republic Act No. 543.1. The pertinent provision of Presidential Decree No. 1528 reads as follows: "SECTION 1. The provisions of existing law to the contrary notwithstanding, the Philippine Long Distance Telephone Company, its successors and assigns, sha 11 pay a fr�anchise ta ;< at the rate of two per.:: !=~D...:LI:!.IJ.l_ of all gross r�eceipts o�f the telephone or other electrical transmission business transacted under its franchise, effective immediately upon the issuance of this Decree and up to the end of the twenty-five years extended term of its franchise under Republic Act No. 6146; Provided, That, except for the change in the rate of franchise tax herein prescribed, it shall be subject to the same terms and conditions ~.J?.....�.~.lL~.~fi..Y. Q.Lq_v i d ed .iQL___....h!..r:tQ..~g~..r:.._......~.?J..!..�..ti,ng_.._._..L~l'.!.-~. I I (Underscoring supplied.) The insertion in the above provision of the phrase "as already provided for under el�:isting

DECISION CTA CASE NO. 4056 - 11 - laws" is an indication of the intention to have e:�:isting enactments touching the referred statute~ construed and applied in harmony w.i th it. These would include the repeal of petitioner's income tax e:-:emption by Repub 1ic: Act No. 5431. In ter�ms of legislative intent, it is assumed that whenever the legislature enacts a provision it has in mind previous statutes relating to the same subject matter, wherefore it is held that in the absence of any e:-:press repeal or amendment therein~ the new provision was enacted in with the legislative policy embodied in these prior statutes, and they all should be construed together. (Sutherland~ Statutory Construction, Vol. 2A~ p. 290.) In support of its stand that the passage of Repub 1 ic Act No. 6146 has re-enacted the "in 1. ieu of all ta~:es" provision in i t s original c:har� ter�~ petitioner cites the case of Cagayan Electric Power & Light Co., Inc. vs. Commissioner of Internal Revenue~ et al. ~ supra~ where the Supreme Court ruled that the wi thdrawa 1 of the in c ome exemption in the original charter of franchisee

DECISION CTA CASE NO. 4056 - 12 ... therein by virtue of Repub 1ic Act No. 5431, was restored by the subsequent legislation which re- enacted the income tax exemption in its franchise. The above-cited case is not decisive insofar as the full restoration of petitioner's income tax exemption is concerned. As adverted to earlier, it is applicable to the instant case only to the e>:tent relied on by respondent, that Republic Act No. 5431 had repealed the income tax e:-:emption of peti t.ioner�. In fact., in passing, the Supreme Court commented in its decision there that: "It is relevant to note that franchise companies like the Philippine Long Distance Telephone Company, have been paying income ta>:, in addition to the f rc:mc hi se ta ~�~ . II In that case, the income tax exemption of peti t.ioner therein, the Cagayan Electric Power & Light Co., Inc., was restored by the e:-:press re- enactment of its income tax exemption in Section 3 of Republic Act No. 6020 pr-omulgated on August 4, 1969, as follows: "SEC. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a franchise taH equal to three per centum of the gross earnings for electric current sold under this fr�anchise, of which two per centum goes

., DECISION CTA CASE NO. 4056 - 1~5 - into the National Tr-easur-y and one per centum goes into the tr-easur-y of the Municipalities of Tagoloan, Opal, Villanueva and Jasaan and Cagayan de Or-o City, as the case ma y be: Pro~'ided, I.b..<E..'.t . tJl~--�-�-?..~..:i.Q.___.f.L~n <;_: .bj,_se.._._._t.�!L__o f �-�-t .b.r.:.!'E._f?.___p_~.r... c;;;.grl..t..YJ!!_ of the gross earnings sha 11 be in lieu of all taxes and assessments of whatever- authority upon pr-ivileges, earnings, income, f1��anchise, and pcll.e~s, wires, transformers, and insulators of the grantee fr-om which taxes and assessments the grantee is her-eby e:�: pr-ess 1 y e:-:empted. " (Under-scar-ing supplied.) In the pr-esent case there was no such express re-enactment in Republic Act No. 6146 nor in Presidential Decree No. 1528, the amendments to petitioner's original franchise, of the "in lieu of all ta:-:es" provision of Section 7 of Publi c Act. No. 3436, petitioner-'s original charter. The pr� .inc .i p l e that tax exemption laws ar-e strictly construed a9ainst the e:-:empticm is spec.i.all y .3ppl .i.c21.ble to contracts granting e:�:empt.ion fr-om ta:�:at.i.on. Such contr��acts ar-e in derogation tht:.~ SOVf."~I'""E.~i(Jn au thor i ty and of commcm right., and therefor�e are not to be e:-:tended beyond the e:-:ac:t and e:-:press requir�ements of the language used, constr-ued strictissimi juris. An exemption from taxation, in or-der to constitute a contract. binding on the

DECISION CTA CASE NO. 4056 -- .1. 4 ��- state, must be clearly and unequi v ocally expressed. Evet-y reasonable doubt shou l d be resolved against an e:�:empt.ion and in fa v or of the ta)d.ng po wer� of the state. The intention to grant such immunity must be clear� beyond a reasonable doubt and the langua~~e used must admit of no Dther reasonable construction. (5.1. Am Jur., pp. 5.1.5-5.1.6.) The rule is well settled that one who claims t o be e)�:ernpt from tht:? paym~:mt of a particular� ta)�: must do so under clear and unmistakable terms found in the statute. Tax exemptions are strictly c: onst.r��ued against the t.a>:paye r ; they being highly disfavored and may almost. be said "to be odious to the law." He who c laims an exemption must. be able t o point to some positive provision of law creating the right.; i t cannot be all.ow~:?d to e)dst upon a mere vague implication or inference. ( Asiatic Petroleum vs. Llanes , 49 Phil � 466, 4 71; Union Garment Co., Inc. vs. Court of Tax Appeals , L-16809, January 31, 1962, 4 SCRA 304; Philippine Acetylene Co., Inc. vs . Commissioner of Internal Revenue , L- 190707, August 17, 1967, 20 SCRA 1056; Republ i c Flour Mil ls , Inc . vs. Commissioner of

DECISION CTA CASE NO. 4056 - 15 - Internal Revenue , L..-�25602' February .18, .1970, 31 SCRA 520; Commissioner of Customs vs. Philippine Acetylene Co. & Court of Tax Appeals , L..-22443, May 29, 1971, 39 SCRA 71; Davao Light and Power Co. , Inc. vs. Commissioner of Customs , L.-�28902, March 29, 1972, 44 SCRA 122.) The right of taxation will not be he 1d to hav e been surrend ered un 1ess the inte n tion to sLwr~mder- is manifested by wor-ds too plain to be mistaken (Ohio Life Insurance & Trust Co . vs. Debol t, 60 Howard, 4.16), �few the state cannot strip itself of the most essential power of taxation by doubtful words; it cannot, by ambiguous language, be deprived of this highest attribute of sovereignty ( Erie Railway Co. vs. Commonwealth of Pennsylvania , 21 Wallace, 492, 499). So, wh~?.n exemption is claimed, it must be shown indubitably to exist, for every presumption is against it, and a well-founded doubt .is fatal tc) the c 1aim (Farrington vs. Tennessee & Coun ty of Shelby , 95 u.s. 679' 686). (Asiatic Petroleum Co. vs. Llanes , 49 Phil. 466, 47.1; Manila Electric Company vs . Commissioner of Internal Revenue , L-29987 81. L..-23844, October 1975, 67 SCRA 35.1.)

DECISION CTA CASE NO. 4056 - 16 - Clearly, the income tC\}{ e:-:emption of petitioner withdrawn by Repub 1ic Act No. 5431 was not restored by Republic Act No. 6146 nor by Presidential Decree No. 1528. We now consider the second issue: Petitioner's alternative argument that the issuance of the 1969 to 1980 deficiency income tax assessment against petitioner was in contravention of the provision of Section 338-A (now Section 278) of the National Internal Revenue Code on non- retroactivity of rulings. The record shows that in a letter dated May 14, 1969, pet.i tioner � s counsel, on beha 1 f of its client Clavecilla Radio System, Inc. requested from the then Commissioner of Internal Revenue, reconsideration of the ruling in Revenue Memorandum Circular No. 41-68 dated November 15, 1968 holding that "all corporations enjoying exemption from income ta:�: by virtue of their franchises are now subject to income tax in view of the amendment of Section 24 of the Tax Code by Republic Act No. 5431.."

DECIS I ON CTA CASE NO . 4056 - .17 - In letter dated June 16, 1969, the Commissioner granted the above reqLiest for reconsideration as follows: (E:-:h. "G") June 16, .1969 Messrs. Meer, Meer and Meer Attorneys-at-Law 9th Floor PLOT Building Legaspi Street Makati, Rizal Gentlemen: This refers to your letter dated May 14, 1969, r�equesting on beha 1 f of your client, thf.? Clavecilla Radio System, Inc., reconsider-ation of that ruling in Revenue Memorandum Circular No. 41-68, dated November 15, 1968, holding that all corporations enjoying exemption from income tax by virtue of their franchises are now subject to income tax in view of the amendment of Section 24 of the Tax Code by Republic Act No. 5431. In reply, I have the honor to inform you that after a thorough and analytical study of the amendatory provision in question, and considering that franchises are of the nature o�f con tr�.:.~c ts between the government and the grantees thereof, this Office has arrived at the conclusion that the said amendatory provision could not have contemplated the withdrawal of the ta:-: e:-:emption of franchise grantees for such withdrawal would impair the obligation of contracts between the government and the grantee, which is prohibited by the constitution. In view of the foregoing, and considering that the Secretary of Justice in interpreting a similar provision of

DECISION CTA CASE NO . 4056 - 18 - law ruled that said law did not appl y to the Manila Railroad Compan y , a franchise grantee, (Opinion No. 227, series of 1948) it .is the opinion of this Office that Re public Act No. 5 4 31 did not repeal the exemption granted in the franchise of your client. Accordingly, your client and other franchise grantees similarly situated shall be subject to tax conformably with the provisions of their respective franchises. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue To confirm the applicability of the Clavecilla ruling to .its c 1 ient, petitioner herein, petitioner's counsel requested for a direct ruling for the Philippine Long Distance Telephone Company. The pertinent excerpts of the confirmatory ruling .issued by the Commissioner of Internal Revenue on ,July 3 , 1969 r�ead: (E:�:h. "G-1") This refers to your letter dated July 2, 1969 requesting confirmation on behalf of your client, the Philippine Long Distance Telephone Company (PLDT), that the ru 1ing contained in our 1et ter dated June 16, .1969, to the effect that Republic Act No. 5431 did not repeal the exemption from income tax granted in the franchise of the Clavecilla Radio System, Inc. and that the Clavecil J.a Radio System, Inc. and other franchise grantees similarly situated are subject to tax conformably with the provisions of their r� espectiv~ franchises, is applicable to your� c:li.c-:.~nt .

DECISION CTA CASE NO . 4056 - 19 - On the basis of Sec. 7 of your franchise, as quoted in your letter, which is similar to the tax provision in the Cl avec i 11 a franchise, our ru 1 ing in the Clavecilla query is applicable to the Philippine Long Distance Telephone Company. Petitioner contends that from the time the r�uling of ,July �<-�' 1969 was issued by the Commissioner specifically exempting petitioner from the payment of income tax under its franchise~ respondent has not issued for an uninterrupted per-iod of fourteen years, any notification or ruling addressed to petitioner revoking, modifying or reversing said ruling or the Clavecilla ruling, until March 30, 1984 when respondent assessed petitioner for income taxes for the years 1969 to 1980. In violation of Section 338-A (now Section 278) of the National Internal Revenue Code respondent, in effect, reversed his rulings retroactively to the prejudice of petitioner who, relying on these n.tl ings, was prf?C 1uded from including said income tax liability in its rate base and deprived of the right to apply for an increase in subscriber's rates commensurate to such an expense to enable petitioner to receive the fair return of 12% allowed to public utilities.

DECISION CTA CASE NO . 4056 - 20 - Section 338-A (now Section 278) of the National Internal Revenue Code reads= / SEC . 3 38-A. N!;:>n - r ~j;.r:_g_~<;:j:: i yJ.J:Y..__.9...f. G!l1.l.n9.2.� Any r�evocation ~ modification~ or reversal of any of the rules and regu 1a tions promu 1gated in accordance with the preceding section or any of the n.llings c:1r circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be pr-ejudicial to the ta:�:payer e:-:cept in the followincJ cases: ( c:\) where the taxpayer deliberately misstates or� omits material facts fr�om his retur-n or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. For his part, respondent avers that the afore- mentioned rulings dated June 16 .::-\nd Ju 1 y 3, 1969 issued by the then Commissioner of Internal Revenue are null and void, having been shown to be contrary to the provisions of the National Internal Revenue Code. There being no ruling to speak of, no vested right accrued undt?r these rulings, thus any revocation or modification thereof may be given retroactive effect without contravening the provision of Section 338-A (now Section 278) of the National Internal Revenue Code in 1 ine with the

DECISION CTA CASE NO. 4056 - 21. - doctrine laid down in the case of Hilado vs. Collector of Internal Revenue , 1.00 Phil. 288. It is contended further that the decision to assess and collect from petitioner deficiency income taxes retroactively for the years 1.969 to 1.980 is in accordance with the Resolution En Bane rendered by the Supreme Court in the case of Radio Communications of the Philippines, Inc. {RCPI for short) vs. Court of Tax Appeals, et al. , G.R. No. 60547, July 11, 1985. Petitioner maintains that the authorities relied on by respondent in support of the principle that the government. is not barred from effecting collection of the proper taxes due and collectible from taxpayers, were decided by the courts on issues of fact. and law obtaining prior to the enactment of Section 338-A of the National Internal Revenue Code on August 9, 1969 and are therefore immaterial and irrelevant to the determination of the effect of said Section 338-A to this case. And the efficacy of the doctrine in the Hilado case has already been negated by the dicta of the Supreme Court in the cases of ABS-CBN Broadcasting

DECISION CTA CASE NO. 4056 ,_ 22 Corporation vs. Court of Tax Appeals and the Commissioner of Internal Revenue , L-52306, October 12, 1981, 108 SCRA 142, and the Commissioner of Internal Revenue vs. Burroughs, Ltd. and the Court o f Ta x Appeals , L-66653, June 19, 1986, 142 SCRA 324 which are now controlling. The position taken by petitioner, to our mind, is meritorious � The doctrine that the government. .is never estopped from collecting a ta:-~ that is legally due it., now stand~;, qualified by Section 338-A (now Section 278) of the Na tiona 1 In ter�na 1 Revenue Code, in the sense that under that section, rulings and circulars, r�u 1es and regulations, promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to ta:-:payers, except in the three instances enumerated therein. The ABS-CBN case and the Burroughs case above- cited by petitioner are in point. In both cases, the Supreme Court applied Section 338-A, having found that the prejudice to peti tic.mer therein CJf the r�etr�oactive application of the revocation of t.he ru 1 ings invo 1 ved 11 is beyond question 11 and 11 in

DECISION CTA CASE NO. 4056 - 23 so far as the enumerated exceptions are concerned, admittedly, petitioner does not fall under any of them." Thus, in the ABS-CBN case, the Supreme Court observed, in closing: This Court is not unaware of the well entrenched principle that the Government is never estopped from collecting ta:�:es because of mistakes or errors on the part of its agents. In fact, utmost caution should be taken in this regard. But, like other pr-inciples of law, this also admits of exceptions in the .interest of justice and fair play. The insf.?rtic.m of Sec t.ion 338-A in to thE? N~:\tional Inter-nal Revenue Code, as held in the case of Tuason, Jr. vs. Lingad, is indicative of legislative intention to SL!pport the principle of good faith. In fact, in the United States, from where Sec. 24(b) was patterned, it has been held that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer. The RCPI case cited by respondent is not controlling. In the resolution of the Supreme Court dated ,July 11, 1985, the only issue raised and resolved by the Court was the effect of Section 24 of Republic Act No. 5431 on the tax exemption of the franchise of petitioner- therein and did not involve the proper interpretation of Section 338-A (now Section 278) of the National Internal Revenue

DECISION CTA CASE NO . 4056 - 24 - Code which is the issue presently under consideration. This is evident from the ruling of the Supreme Court as follows: J-( :�( l�( :�( The issue raised to this Court nt')W is the va 1 idi ty of the respondent court's decision which ruled that the exemption under Republic Act No. 4054 was repealed by Section 24 of Repub 1 ic Act No. 5431, dated June 2"7, 1968 which reads: (d) The provisions of ~.l.:L.i.E..t: i .!}.Q..____J?..P.~.f;...i aJ.....-. . .9.1::........._.9.�.f.l~r.E.tt laws to the contrary notwithstanding, a 11 corporate ta:�(payers not specifically el�(empt Linder� Sec t.ions 24 (c) ( 1.) and 27 of this Code shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the government, inc 1uding t.h:~ Gc1vernment Service Insurance System and the Social Security System but excluding educational institutions, shall pay such rate of tax upon their t a:�(able net .i ncome as are i mposed by this section upon associations or corporations engaged .in a simi J. ar� business or .industr�y." (Underlining supplied.) An e:�(amina t.ion of Sec t.ion 24 of the Tax Code as amended shows clearly that the law .intended all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the power of Congress to repeal tt1e earlier exemption .it granted.

DECISION CTA CASE NO. 4056 - 25 -- Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide that no franchise shall be granted to any individual, firm, or corporation except under the condition that it shall be subject to amendment, alteration, or repeal by the legislature when the public interest so requires. There is no question as to the public interest involved. The country needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of entities entitled to ta:-: f.::>xemption. The petitioner is not covered by the pr-ovision. Considering the foregoing, the Court resolved to DENY the petition for lack of mer�i t. The decision of the respondent court is affirmed. Here in the case at bar, which is on all fours with the ABS-CBN case, supra, the prejudice to petitioner of the retroactive application of respondent's deficiency income assessment, which in effect revoked the ruling issued to petitioner on cJuly 3, .1969, has been sufficiently established. And is no showing that petitioner falls under any of the three exceptions specified in Section 338-A. The records show that from July 3, 1969, when

DEC I SION CTA CASE NO. 4056 - 26 -� the Commissioner of Internal Revenue issued the ruling exempting petitioner from the payment of income tax under its franchise, respondent has not issued any notification or ruling addressed to petitioner revoking, modifying or reversing said ruling until by his assessment dated March 30, 1988, respondent assessed petitioner for deficiency income taxes for the years 1969 to 1980. (t.s.n., pp. 14-18, April, 1987.) Pet.i t.i.cmer' s lone witness, .its Senior E:�:ecutive Vice--President and General Counsel, testified that relying on the assurance of the Commissioner of Internal Revenue that petitioner was e:�:empt income insp.i.te of the enactment of Republic Act No. 5431, petitioner did not. include said ta:�:es c.~s an element of cost in applying for the approval by the regulatory body of the rates payable by its subscribers. Thus, petitioner would be pr�ejud.iced .ir-reparably by .its payment of the P495,425,391.00 assessment as it would bE~ .impossible to retroactively readjust its rates from 1969 to 1980 and shift such cost to its

DECISION CTA CASE NO. 4056 - 27 - subscriber-s during that per�iod. His e:�:planation for this is as follows: ( t. s. n. , pp. 24-25, Apr i 1 1' 1987. ) ~R.QS�._E 'LA.!."LL~B.IJ..Q.N B.I.IY. .~. . -. .E:.A.N.!:.?..l!::::. tNB.N Q. If your company is finally adjudged liable for the deficiency income taxes for the years 1969 to 1980 in 1987 or at any later date, is it nt1t possible for PLDT to recoup such expense for the prior period by applying to the National Telecommunications for an increase in rate in order to cover such cost? A. That is not possible. In the first place, a rate order or judgment only oper-ates prospectively, never retroac: ti ve 1y. The r-ate .::'ldjustment will only be base:~d on the current expenses or cost and such other factors in order to provide a public utility rate that is fair and reasonable on a prospective basis. Elements of cost or expenses, such as taxes for past per-iods nc>tc:'lb 1 y e:�: tending back to 1969 cannot be considered in any application for rate adjustment in 1987. Besides, the taxes for the said per-iod shou J. rJ a f feet the subscribers of PLDT during said period and there is no way we can ask them for an adjustment of the rates that they had previously considered and was not made part of the e:�:penses

DECISION CTA CASE NO. 4056 - 28 - or cost for purposes of fixing the public utility rate then in force. That taxes are includible as elements of cost in the determination of the cost of service of pub 1 ic uti 1 i ty rate mak .in~h is supported by the following authority quoted by petitioner: "Wher�e public utilities are concerned, whether public or publicly owned, the tax burden is shifted to consLtme~rs thr�ough the rate chc.'\rged for service. Accordinq 1y, ta:�:es are tr�eated as revenue deductions in determininq: (a) the ac:tu.:':\1 r�eturn which the utility is ear-r1inq at any particular time; and (b) the rate of return that would result fnJm a:'\ specified level of revenues. In determining the cost of service of public utility rate making, it is proper to include as costs the taxes that would be p~'lid if a fair ret.Ltrn were earned." (Paul J. Garfield and Wallace F. Lovejoy, Public Ut.i.l i ty Economics, Prentic:f:?-Hal J., Inc:., p. 392.) Undoubtedly, petitioner could have shifted the income ta:�: bur�den to its subscr�ibers dur-ing the years in question if it had not relied on the ntl ings ( E>:hs. "G" "G-1") issued by the Commissioner of Internal Revenue. It is clear from the foregoing that to impose the deficiency income t.::n: assessment on petitioner� would bf? prejudicic.'l to .i. t for� petitioner� can no 1onqer recover sue: h

DECISION CTA CASE NO. 4056 �- 2 9 - costs from its s u bscribe r s to e nabl e it t o earn the 12/. of consistently <ad o pte d in F'hi 1 i p p i n e d e c i s i o n s a s t h e fair�� r-,;~te of n~turn allowed on the inves t men t s of public utilities. (Manila Electric Company vs. Public Service Commission , .18 SCRA 65.1.; Republic of the Phi 1ippines vs. Public Service Commission and Manila Electric Company , 4.1. SCRA 644.) At any rate, t h e prejudice th a t wo u l d r�esult to petitioner Philippine Long Dis tan ce Telephone Company by a retroactive app l ica t.icm of respondent's deficiency income tax assessment which revoked his rulings of June .16 and July 3, 1969 is beyon d question for it will be deprived of the very substantial a mou n t of P 4 95, 4 25,39.1.00. And .i.n~;;ofar� as the enumer~:;\ted e:�:cepticms are concerned, admith?dly, petitioner does not fall unde,.-� any of them. (See Commissioner of Internal Revenue vs. Burroughs Limited , supra.) Respondent advances the argument that when t he Commissioner of Internal Re v enue, under Re v enue Memorandum Order No. 15-72 issued on May 17, .1.972, reverted to his position that all franchise holders

DECISION CTA CASE NO . 4056 - 30 - are subject to income tax in view of the amendment of Section 24 of the Tax Code by Republic Act No. 5431, and proceeded to investigate and assess franchise holders for income ta:{ 1iab.i 1i ties, why did petitioner not contest such Revenue Memorandum Order to protect its interest? Petitioner, on the other hand, disowns any knowledge or noti c e of Revenue Memorandum Order No. 1.5-72 until July 29, 1986 when n:~spondent ser�ved upon petitioner his revised assessment dated July 17, 1986 ( E:�:h. "E") wherein petitioner was advised about such Order for the first time. It is insisted that in the absence of due notice, respondent cannot claim that t he rulings c ontained in E>: hi bits "G" and "G-�1", have already been effectively revoked by the mere issuance of Revenue Memorandum Order No. 15-72. We find petitioner's contention tenable. Revenue Memorandum Order� No. 15-- 72 is reproduced hereunder: (E>:h. "4") May 17, 1972 REVENUE MEMORANDUM ORDER NO. !5-?2 SUBJECT: b i ~Q.il.~. !:.~.-o t _E.r.::E.In c tL-l~�L...t!.o 1d.~_[.� _t._g__....J.o.~..9.m.�.....-...I~l:L........!::m.f!.�..r.:._____flg_<;;..t_.:!.9 .o.

DECISION CTA CASE NO. 4056 - 31 - ~.4...Lc;JJ______. _g__f_________ th.?-. ..........Ifo..lL______(;._g_Q_~J--.-- ..SI..?.. !JJ. ?..~_r.._t.~fL______g_y_. ...B.~.R.I::\.hLt.~----�--6_!;__t_____N_9_.! ~.4. :;~!...~-- TO The Assessment Department, particu 1ar 1y the Income T<:!\:-: Division, Assessment Branches Investigating Units, par��ticu 1ar l y the Services 8~ M.i.s:;c?.llaneous (Audit) Division and others concerned: Section 24 (d) of the Ta:-: Code, as inserted by Republic Act No. 543.1, pr-ovides: II ( ci ) Ih.~..................P..r..9..Y...:i:. ?..J....9.0..?... --��������_g.f.__ ~.!~...i:.?..:t..:!:.n.g_________?..P..~.�;..!-.sq__________g_r:_ genera 1 l~-~?...............�-����-����_t._g_________________t._hg______________J;P..O...t.r.:..~r.:Y. D.PJ..~..!.t. h.?...t.E\_O.ft.:i:.D_g_, a 11 corpclr--a te ta:-:payer�s not specifically e:-:empt under Sections 24 (c) ( 1) and 27 of this Code (referring to the National Internal Revenue Code) shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the Government, including the Government Ser�v ice e~ Insur-ance System, Social Security System but excluding educational institutions, shall pay such r�ate of ta:-: upon their ta:-:able net income as are imposed by this section upon associations or corporations engaged in a similar business or inciustr�y." (Underscoring supplied) Pursuant to the abovequoted pr��ov is ion of 1aw, a 11 cor-porations, except those specifically exempt under Section 24(c)(l) and 27 of the Tax Code, are subj f;!c: t. to .i.ncOIM? ta:-: pr�esc r i bed in Section 24 of the Ta:-: Code. According 1y

DECISION CTA CASE NO. 4056 - 32 even franchise holders whose franchises contain a provision that the franchise t.a:�: prescribf:"?d therein shall be in 1 ieu of a 11 ta:�:es are subject to income ta:�: for ta:�:able years beginning after June 30, 1968 (see Section 10, Republic Act. No. 5431). This stand is supported by the opinion of the Secretary of Justice, contained ir1 his 3rd Indol~sement to the Secretary of Finance, dated March 28, 1969, the pertinent portion of which is quoted hereunder: "The con te:�n tion that Republic Act No. 5431 merely intended to change the existing rates of corporate ta x applicable to corpor�ation s a 1 r� c~ady subject to income ta x and not to l if t the tax exemptions granted by special law, is without merit, just as the argument that the term 'corporate ta:�:payer' should be construed as referring on 1y to those corporations already subject to ta:�: at. the time of the amendment. For� in prov iding for the general application of the new tax rates and expressly excluding therefrom ' all corporate ta>:payers not specifically �Y..!.:f.�Y..t.np_t.._ under Section 27 of this Code' which significantly refer to entities ~.tl9..11Y.......g;.:;.?.!!l..P...t. f r� om .i. n c orne t a:�: , Section 24(d) w.:1s evidently meant to be applicable even to cor�pora tions enj cJy irHJ income ta:�: e>:empt.ion before the enactment of RA 5431. Otherwise, there~ would have been no need for said e:�:c lusion. Th-? resulting conclusions is that OLitside of those referred to .i.n Section

DECISION CTA CASE NO. 4056 33 24(c)(1) and 27 of the Tax Code, all corporations whose liability for income tax was before governed by general laws or special statutes applicable to designated classes or groups of corporate entities, are now subject to the rates prescribed in RA 5431." In view thereof, all investigating and assessment units concerned are hereby instructed to ascertain the income taxes due from franchise holders for the years 1968, 1969, 1970 and 1971 and to issue the corresponding assessments against them. All internal revenue officers and others concerned are enjoined to give this circular as wide a publicity as possible. In the Statement of Procedural Rules, par. 60.1. 201 ( 1) in force in U.S. law from where SE~c ti.on 338-A (now Section 278) of our National Internal Revenue Code is patterned, the applicable portions on the "effect of r-ulings" is quoted below: " ( 4) A ruling found to be in error or- not in acc:or-�d with the current views of the Service may be modified or r-evoked. Modification or- r-evocation may be effected by a notice to the ta}tpayer to whom the ruling originally was issued, or by a Revenue Ruling or other statement published in the Internal Revenue Bulletin. ( 5) E:-:cept in rare or� unusual circumstances, the revocation or modification of a ruling will not be applied retroactively with respect to the

DECISION CTA CASE NO. 4056 - 34 - taxpayer to whom the ruling was originally issued or to a taxpayer whose ta>: liability was directly involved in such ruling if >: >: >: (v) the ta>:payer directly involved in the ruling acted in good faith in reliance upon the ruling and the retroactive revocation would be to his detriment. (7) If a ruling is issued covering a continuing action or a series of actions, and it is determined that the ruling was in error or no longer in accord with the position of the Service, the Commissioner ordinarily will limit the retroactivity of the revocation or modification to a date not earlier than that on which the original ruling was modified or revoked." (Vol. 9, Mertens, Law of Federal Income Ta>:ation, Chap. 49, pp. 146-��147.) Under the above quoted Section ( 4) , the two ways by which the modification or revocation of a ruling may be effected are ( 1) by a notice to the ta>:payer to whom the ruling was originally issued; or- ( 2) by a revenue ruling or other statement published in the Internal Revenue Bulletin. As bor-ne by the records, Revenue Memorandum Order No. 15-72 was not published in the Official Gazette and it was not addressed to petitioner nor was petitioner furnished a copy or notified

DECISION CTA CASE NO. 4056 - 35 - ther-eof until r-espondent sent the r-evised and r-educed assessment dated July 17~ 1986 on July 29~ 1986 (E>:h. "E") wher-e he advised petitioner- of the e~�:istence of said Or-der- for- the fir-st time. (t.s.n.~ pp. 30-31~ Apr-il 1, 1987.) Since Revenue Memor-andum Or-der- No. 15-72 was never- published and neither- was petitioner.. ever- notified of its e~�: i s tence until the issuance of the assessment on July 17, 1986, it seems clear- that said Revenue Memor-andum Or-der- dated May .17, 1.972 could not have effected the r-evocation or- r-ever-sal of the r-uling issued to petitioner- on July 3, .1969. (See Sy Man vs. Jacinto, 93 Phil. 1.093; People vs. Que Po Lay, 94 Phil. 640; Lim Hoa Sing vs. Central Bank , 1.04 Phil. 573.) As mentioned ear-lier-, petitioner- was never� noti �f .ied of any r-evocation or� r-ever-sa 1 of the July 3,1969 r-uling until the issuance of the deficiency income ta:�: assessment invo 1 V~d her-ein on Mar-ch 30, 1984. It is thus clear- beyond doubt that the said deficiency assessment is a r-etr-oactive application of the r-evocation of said July .1969 r-uling which would

DECISION CTA CASE NO. 4056 - 36 - be pr-ejudicial to petitioner- in violation of Section 338-A (now Section 278) of the National Inter-n al Revenue Code. Consequently~ the decision of r-espondent holding petitioner- Philippine Long Distance Telephone Company 1 iable for- deficiency income taxes in the amount of P495,425~391.00 for- the year-s 1969 to 1980 cannot be sustained, notwithstanding our- finding with r-espect to the fir-st issue that petitioner-'s income tax exemption has not been r-estor-ed. WHEREFORE, the judgment under review should be as it is hereby reversed. No costs. SO ORDERED. Quezon City~ Metr-o Manila, December- 28, 1988. AMANTE Pr-es.idi C. ROAOOIN Associate cJudge

DECISION CTA CASE NO . 4056 - 37 �- CERT I F I CAT I 0 N I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution . ~~J Presiding Judge Court of Tax Appeals